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Several characteristics of tangible fixed assets. Intellectual capital
encompasses the intangible, nonphysical
intellectual capital make it assets represented by customer
relationships, product/service
difficult to determine a fair value. propositions, processes, innovations,
supplier relationships, employees, and
digital capability, which are employed in
combination by the business to create
synergies that drive future value creation.
Value creation is dependent on the
Improved understanding can lead to both earnings growth and a return on invested growth rate (g), ROIC, and WACC in
improved actual performance and capital (ROIC) exceeding the weighted combination with the net operating profit
increased certainty about future average cost of capital (WACC) that is after tax (NOPAT). Value is always created
performance, both factors leading to funding that business. Funding of this when ROIC is improved. However, growth
increased business value. invested capital is provided by debt and will only lead to value creation when ROIC
equity capital (see the chart “Funding exceeds WACC. With simplifying
Value creation — a technical Providers’ Value Creation”). assumptions of a constant growth and
perspective Invested financial capital represents ROIC rates, according to McKinsey & Co’s
Value is created by employing both the the retained value created from the guide, Valuation: Measuring and Managing
financial and intellectual capital of a business’s historic performance and the Value of Companies (Seventh Edition),
business to generate a combination of comprises net working capital and this relationship can be represented by the
Funding providers’ value creation
Invested capital
Financial Intellectual
capital capital
Operating cycle
Return on
Investment invested capital
rate
Growth rate
Net operating
Funding cycle profit after tax
Cost of debt Cost of equity Release of
Investment capital Weighted capital assets to
into assets average cost reduce
of capital funding
Debt capital Equity capital
Funding
Figure 1: Funding providers’ value creation
28 I FM MAGAZINE I February 2022